Breeding Herd Drives Market Optimism

Following 20 months of negative returns, pork production has finally turned profitable — and it's expected to stay in the black, for the most part, through 2005.

If U.S. pork producers can resist expanding the breeding herd until near the end of 2004, they will enjoy 12 to 18 months of profitable production, says University of Missouri agricultural economist Glenn Grimes.

“With the punishment that we've had, we think there is a good possibility that producers will keep productivity growth at less than 1% to make this happen,” he says.

Points for Profits

The breeding herd is down about 3%, competing meat supplies are all down and cheap grain prices are on the horizon, Grimes reported at a price outlook talk during World Pork Expo, Des Moines, IA.

The breeding herd reduction has already translated into reduced pork supplies, down about 3% the last few months, and projected to remain down 2% for summer and fall, adds Chris Hurt, Purdue University agricultural economist.

Two factors weighed in to help prevent a fourth quarter 2002 disaster similar to the one seen in 1998. Shackle space was not as tight as expected, and producers definitely pulled marketings forward, explains Grimes.

“Packers continued to improve their productivity. Even after plant closings at Marshall, MO, and Dubuque, IA, hog slaughter capacity in 2002 was nearly 400,000 head per day under federal inspection. In fact, in recent years, there were 64 days with more than 390,000 head slaughtered under federal inspection. In the last half of 2002, there were 34 days with slaughter above 390,000,” he says.

Shackle space should continue to be adequate for the next year or more as long as a major packing plant or two doesn't close, stresses Grimes.

Pork demand dipped in the first four months of 2003, but should rebound and finish the year strong, says Grimes.

That rebound will boost hog prices, fueled by the Canadian cow that tested positive for bovine spongiform encephalopathy (BSE) in Alberta, says Hurt.

The largest impact of that BSE case will be the reduced beef supply coming from Canada, a result of the U.S. ban. Last year, Canada supplied 8% of all beef consumed in the U.S.

“The reduction of this amount of beef supply seems to be the dominating impact, as live U.S. cattle prices have topped $80/live hundredweight in June for the first time ever,” Hurt observes. “Pork demand will be enhanced as consumers respond to the record high retail beef prices with some substitution of pork.”

The pork trade picture with Canada should also weigh in to help keep U.S. hog prices healthy.

Canada's estimated pig crop for the second quarter of 2003 rose slightly, but combined farrowing intentions for the U.S. and Canada were down just over 2% in the second quarter from a year earlier, says Grimes.

Exchange rates favor Canada supplying less than last year's 6% of live hogs slaughtered in the U.S., notes Hurt. “The U.S. dollar has dropped in value relative to the Canadian dollar by 13% this year. The strengthening Canadian dollar provides less incentive to ship hogs to the U.S. for finishing and processing. However, it will take more time for this impact to develop, as most of these hogs enter the U.S. on coordinated finishing contracts,” he adds.

On the pork export side, the U.S. may see increased sales to Japan and South Korea as a result of those countries' ban on beef from Canada, says Hurt.

Price Predictions

All signs point to somewhat profitable times ahead. Grimes predicts some modest profits for 2003 (Table 1). The futures market is suggesting there is a chance that live hogs may average $40/cwt., base price, for the year. High prices for the year may occur in August, a rarity, notes Grimes.

For 2004-2005, Grimes estimates base live hog prices should average $43/cwt. (Table 2). For the best producers, this will convert into $20/head profits. For the poorest producers, this will mean breakeven returns, he points out.

Purdue's Hurt is more optimistic than Grimes about hog returns for the remainder of 2003. He predicts live hog prices will average in the low- to mid-$40s this summer, before falling back to the very high $30s to low $40s for the fall.

“If this does occur, the year would show a modest positive margin for many hog producers,” he says.

Challenges Ahead

Despite the positive turn in the hog cycle, Grimes says the hog industry still faces stiff challenges in the next few years. “We believe the odds are high that productivity growth will be above demand growth and the industry will struggle to keep production in line with demand.”